Companies enter into finder agreements in a variety of business contexts. The company may be looking for financing, strategic partners, acquirers, customers, or some other opportunity. The company hires a finder to identify potential opportunities for a fee. The arrangement between a company and a finder should be clearly documented with a finder agreement. The following are some of the keys terms a company should consider in negotiating and documenting a finder agreement:
The amount and type of compensation depends on the value of the finder’s contacts, the difficulty in closing the transaction, the expected value of the transaction, and the uniqueness of the finder’s services. From the company’s perspective, the ultimate goal is to give away as little as possible while still incentivizing the finder to do a thorough job and deliver on the opportunity. There are several compensation structures to choose from. Here are the most common structures:
This is the most common compensation structure in a finder agreement. The finder earns a percentage of the gross proceeds the company receives from the transaction resulting from the finder’s introduction. The percentage can increase or decrease in proportion to the proceeds. For example, the finder could receive 3% of the first $100,000 of proceeds; 2% of the next $200,000 of proceeds; and 1% of all additional proceeds. The payment obligation may terminate after a certain time or continue in perpetuity.
In this structure, the company agrees to pay the finder a certain fee over time. For example, the company may pay the finder $5,000 a month. This structure is more common when the finder is providing some sort of advisory services to the company that has value whether or not a deal is ultimately consummated.
Either of the above could be paid in the form of equity compensation instead of cash. The finder could receive some form of equity compensation based either on the amount of gross proceeds or the time of service. The equity compensation may be in the form of an actual ownership interest in the company. Alternatively, it could be in the form of “phantom” ownership, namely an award that gives the finder the financial benefits of ownership in the company under certain circumstances (such as a sale of the company) but without any voting or other approval rights.
The above forms of compensation can be combined in numerous ways. For example, a finder could receive a monthly fee of $5,000 a month, plus 2% of the value of the transaction paid in cash, and 1% of the value of the transaction paid in equity.
Any of the above arrangements could be subject to a minimum or a maximum. The minimum or maximum could apply on a per transaction basis or for the entire relationship between the parties.
The parties should decide whether or not the finder is entitled to reimbursement for his or her out-of-pocket expenses. If reimbursement is available, the parties may want to require preapproval of expenses or set a cap on the amount of reimbursement.
The parties should determine a method to identify prospects that will be covered by the finder agreement. The prospects could be indentified at the time of the agreement, or the finder could have a right to identify prospects from time to time. The company may want to limit the types of prospects the finder may identify, for example, prospects in a specific geographic region. The company may also seek the right to exclude certain prospects with whom it has a preexisting relationship.
The parties should agree on how long the payment obligations last after the termination of the finder agreement. The parties should also agree on the conditions under which the agreement can be terminated.
Both the finder and the company should discuss any proposed arrangement with their tax advisors. There may be situations where a certain structure is more advantageous than another. For example, if the value of equity is likely to increase significantly over time, it may make sense to award the equity subject to a vesting schedule with the finder making an election under §83(b) of the Internal Revenue Code.
If the company is using a finder to identify potential investors, the company should be wary of using a finder who is not a registered broker-dealer. If the company pays anything that could be construed as a commission to an unregistered broker-dealer in connection with the sale of its securities, it may lose the federal and state securities laws exemptions it relied on to make the sales without registration.